Pan-European instant payments: is TIPS worth the while?

In developed countries, instant money transfers are something that has moved on from "nice to have" to "must have". There is practically nothing that would prevent an international instant transfer settlement system, except that building one is a demanding task.

National instant payment systems are already operational or are being launched worldwide. Banks across Europe are very aware of the need to provide their clients with real-time payments, not only domestic, but also cross-border. In Europe, this presents a certain challenge for the next stage of the evolution of real-time banking.

While there is already a pan-European payment scheme "SEPA Inst", as many as 34 markets in Europe have successfully implemented national instant payment systems, or are now working on them. This makes "real" cross-border instant payments, i.e., those operating both within the euro area and outside it, somewhat complicated.

Two systems of euro-payments

For any bank that transacts outside its home market, connecting to a pan-European system is a strategic priority. However, which path they take is up to them. The two systems that compete in the instant payment market are EBA Clearing RT1 and the European Central Bank's TARGET INSTANT PAYMENTS (TIPS) system. How can banks decide which solution to prioritize regarding their resources, and to which to connect to?

So far, RT1 has more members, 75 to be exact, but it is a closed, membership fee-based system controlled by investment banks, with strict testing deadlines. TIPS, on the other hand, does not charge any membership fees and could potentially be open to all banks.

The key difference is the indirect model available for TIPS. It requires the use of the TARGET2 settlement account in the European Central Bank (ECB) but does not require the account to belong to a payment service provider (PSP) or a payment initiation service provider (PISP). Particularly in the light of PSD2 regulations, smaller banks or fintechs may seek partnerships with a sponsoring bank that has an account in the TARGET2 (T2) system. As a result, the scope of TIPS can be much broader than that of RT1, especially given the role of new payment market players in serving the underbanked.

How does TIPS work?

The participating payment service providers are required to maintain the liquidity of a special account opened in the relevant central bank which processes instant payments. Deposits into TIPS accounts are only possible during TARGET2 opening hours.

The following diagram is an outline of how TIPS works:

1.   The participant sends a message regarding an SCT instant payment transaction to TIPS.

2.   TIPS approves and reserves the amount to be transferred.

3.   TIPS transfers the payment to the receiving participant for approval.

4.   The receiving participant sends a positive reply to TIPS.

5.   TIPS settles the payment.

6.   TIPS confirms settlement with the sending participant.

7.   TIPS confirms the clearing to the receiving participant.

TIPS aims to encourage payment service providers to join it by enabling them to reach customers at a low cost (the cost of a single transaction in the TIPS system is approximately EUR 0.002). The ECB hopes that instant payments will soon become commonplace across Europe. Then it will also support other currencies to minimize fragmentation in the European retail payment market.

RT 1 vs. TIPS: the race is on!

Banks constitute the majority, in terms of both customer number and transaction volume. Therefore, most of the instant cross-border payments will be made in a bank-to-bank system and not necessarily in an external network, at least not in the short term. Therefore, a system which includes as many banks as possible is of great importance. These factors could influence the banks' decision to choose a priority real-time system, thus tipping the scales in favor of RT1.

However, there are risks associated with a relatively closed network. Real-time services cannot be offered to customers if there is a high risk that they will be unable to send all payments in real time. Moreover, low availability can cause the service to be terminated altogether due to customer churn. TIPS seems to be winning the banking budget priority race in regard to joining a pan-European instant payment system.

Given the potential of RT1 and TIPS in terms of coverage, it seems logical for banks to join both systems. However, banks need to consider their complex legacy IT environments, the integration of which is costly. Their fintech competitors are not burdened with legacy technology, and since they are not members of the European Banking Association (EBA), they have no access to RT1. Therefore, they basically have a single payment scheme to consider: TIPS.

Instant money stimulates business

Connecting to the TIPS system and offering pan-European instant payments services is the next step on the way to real-time banking that supports the global e-commerce market. The scope of implementation of TIPS can be small at first due to the low transaction volume, but this doesn't mean that it will be a low-quality service.

The initial development of pan-European TIPS instant payment services will aim at meeting the needs of the largest and most important corporate clients. However, corporate clients need more than just real-time payments.  They need real-time money transfer information, liquidity management, and additional data (BI), as well as the possibility to integrate other systems and message types with it.

The pan-European system does not only concern a new type of payment, but also a new, increasingly global business environment. Any such significant system platform must now easily scale to increasing volumes and integrate with global cross-border payment systems to deliver the quality and reach of services customers expect.

Pan-European instant payments available in 2022?

Europe-wide instant payments can be introduced even by the end of this year. All PSPs that have joined the SCT Inst scheme and are available in TARGET2 should also be available in the TIPS central bank's money liquidity account.

The upcoming banking transformation will enable taking full advantage of Data-Driven Banking. At CCA Europe, we have established an in-house instant payment and ISO 20022 think-tank. Together, we are considering the best ways to prepare our clients and business partners for the upcoming changes. We believe that the banks that are the first to provide their clients with instant cross-border transfers will be the winners.

More details on the TIPS system coming soon.